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Vegas Gets Debt Crazy

The debt would just pile higher if MGM Mirage acquires Mandalay.

So, MGM Mirage(NYSE:MGG), the debt-loving Las Vegas (and beyond) casino operator, has made a $7.65 billion cash offer to buy out debt-loving Las Vegas (and beyond) casino operator Mandalay Resorts(NYSE:MBG)? It would be a marriage made in debt heaven.

Before we start extrapolating the two companies' 2003 results and try to project the combined company's future, let's step back and consider something else both bring to the table: all that debt.

MGM, with annual revenues of around $4 billion, carries net debt of $5.2 billion. Mandalay brings in about $2.6 billion and carries $2.9 billion in debt. MGM has said it will assume the Mandalay debt and pay $4.85 billion cash. Curiously, MGM has around $200 million in cash on its books; maybe that's the mirage?

If this debt orgy is consummated, the combined company should expect some $7 billion in revenue (assuming the disposal of a casino in Detroit) and a potential net debt burden of $12.95 billion ($5.2 billion from MGM, $2.9 billion from Mandalay, plus $4.85 billion to bring the two together -- or, rounded, an unlucky $13 billion). Debt would rise to almost two times sales.

Even The Donald's Trump Hotels(NYSE:DJT), which is seeking debt relief for its long-suffering shareholders, only lumbers under a debt load of 1.5 times revenue. Consider, too, that peers such as Caesars(NYSE:CZR) and Harrah's(NYSE:HET) service net debt loads below annual revenue. Might they not have a significant advantage should a deep and lasting recession take hold?

Yes, the casino business is booming. As Jeff Hwang noted on Friday, Mandalay's recent results have been nothing short of wonderful. Ah, you say, and this is the high-margin casino business, right? Not really. The best operating margins managed by anyone mentioned so far is around 21%. A simple stock screener tells you that many an established company does better -- without the wild card of significant debt.

The news this morning was that MGM Mirage's $68-a-share bid may be low. The market seems to agree, since Mandalay is trading at $72 a share. If only MGM Mirage would add just a little more to its offer, everything would be A-OK with this debt orgy, right? I might just sit this one out.